Roughly eight in ten Americans work for companies that sponsor a 401(k) or similar tax-deferred retirement plan, according to U.S. Census Bureau estimates, but just 41 percent of employees actually utilize these savings vehicles. Although that implies that only about a third of employed Americans are regularly contributing to a workplace retirement account, the amount of money these individuals have been able to set aside is substantial. For example, participants in 401(k)s and other defined contribution (DC) plans controlled $7.7 trillion at the end of the first quarter of 2018, according to updated data from the Investment Company Institute (ICI). That represented 27 percent of all retirement assets in Q1 and equated to roughly one-tenth of Americans’ aggregate financial assets.
Total DC plan assets during the first three months of 2018 were unable to surpass the record high hit at the end of 2017, but this was to be expected since the benchmark S&P 500 index in Q1 posted its first quarterly loss in almost three years. Considering that stocks have not only rebounded sharply since then but even climbed to new all-time highs, subsequent ICI data should reflect a significant increase in 401(k) balances. More importantly, these tax-advantaged savings vehicles benefit the most from consistent participation over a long time horizon, and encouragingly only 1.1 percent of account owners stopped making contributions to their 401(k)s and other DC plans in the first quarter. Further, hardship withdrawals were taken by just 0.5 percent of DC plan participants in Q1, and only 1.3 percent of account owners took any sort of withdrawal whatsoever. As for borrowing activity, 16.4 percent of all participants had a related loan outstanding at the end of the first quarter, the best reading since 2009.
A recent seasonal pattern suggests that borrowing may pick up later this year, but a tight labor market and an uptick in wage growth could provide Americans with more disposable income and in turn lessen the need to tap into retirement assets early. While having the ability to borrow from your 401(k) can definitely be useful in the event of an unexpected financial setback, it is generally a good idea to never touch your long-term savings until you are ready to retire. This is especially true since one in ten 401(k) loans are never repaid in full, and too many of the individuals that can repay the funds often turn into serial borrowers. Moreover, recent research by Alight Solutions estimated that because workers with 401(k) loans are allocating funds to repay the liability, they save about 20 percent less than people without a loan. What is worse is that roughly 15 percent of workers with 401(k) loans eventually stop making any retirement contributions.
Sources: U.S. Census Bureau, Bloomberg, ICI, K@W, NAPA, Alight Solutions
Post author: Charles Couch